How to Plan for the Death of a Business Owner

Frequent readers of Practical Ecommerce might have noticed that my legal posts have been missing for many months. I wish I could attribute the long absence to a holiday. But, unfortunately, I can’t. The combination of a busy travel schedule and the passing of my mom has kept me from writing this column.

However, these have also given me time to reflect on my own preparedness for life’s unforeseen events. With this post, my hope is that others may learn from my experience and better protect their families and businesses.

Business Survival

Like most business questions, the first place to look to find out whether you’re ready is inside the governing documents of your business entity. The activities of a company are governed by its own bylaws, and the activities of a limited liability company are regulated by its working agreement.

As my law firm is a limited liability company, and because LLCs are the most modern and common form of business entities, I will concentrate on operating agreements. That said, the analysis that follows applies to both corporations and LLCs.

… the first place to look to find out whether you’re ready is inside the governing documents of your business entity.

Every operating agreement should include provisions to take care of the death or permanent disability of a member. In the event of my law firm, our working agreement says that the death or permanent disability of a member triggers a direct offer to sell the membership interest of the member. Permanent disability occurs where a member has a physical or mental impairment that substantially limits one or more life activities and is expected to last for six months or the remainder of the member’s life. Therefore, short-term disability doesn’t trigger an automatic sale.

Why does disability or death trigger a sale rather than giving the membership interest to the heir of the deceased or disabled person? There are two key reasons. First, non-lawyers cannot have a membership interest in a law firm. Therefore, in my case, passing the membership interest for my spouse would not work.

Secondly, I doubt that my spouse would like to be in company with my spouse. Though she’s lovely and extremely intelligent, she does not know how to run a law firm. And if you’re taxed as an S corporation, there can be even more reasons to avoid transferring membership attention into an heir: It could violate your S-corp status.

Though death or permanent disability triggers a”sale,” it doesn’t necessarily mean that the business has to be concerned about its cash flow. To provide our law firm with the financial means to support such a sale without affecting the viability of the company, we’ve got an insurance policy on every member.

Consequently, death and disability not only activates the sale terms of the operating agreement, but in addition, it activates the insurance policy to cover the company’s repurchase of the deceased or disabled member’s membership interest. Upon my death, my spouse is going to be given a wonderful payout that’s paid, at least in part, by our small business insurance policy.

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Family Protection

But that is not the end of trainings. In the absence of an estate plan, my personal assets may end up in probate court. To avoid the time and cost associated with probate proceedings and to safeguard the interests of my wife and kid, we hired an estate lawyer to make a few important documents (yes, lawyers hire attorneys).

Our estate planning attorney made a trust to handle our resources throughout our lifetimes and to distribute our resources after our death. When my wife and I perish, our family trust ensures that our assets pass to our child and are used to encourage her and her schooling. Our child is provided with only limited access to the financial assets of our family trust before age 18, to protect against dumb decisions. After age 18, she’s full access. All our major assets are transferred to the trust, including our dwelling.

Our estate planning lawyer provided us with wills that control the distribution of our resources after our death and that move those assets into the trust. Our lawyer also supplied two important types: designation of patient advocate and durable power of attorney. The designation of patient advocate form, in my case, assigns my spouse as my patient advocate to generate care, custody, and medical treatment decisions for me if I’m incapacitated. Along with the durable power of attorney form designates my spouse as my power of attorney if I am unable to undertake a particular legal action myself.

The Inevitable

This is not a complete analysis of the steps a business owner should take to get ready for his untimely death or disability. I hope, nevertheless, that my situation has offered some insight. Furthermore, I hope it spurs one to act to safeguard your company and your loved ones. I hate to break it to you: We are all going to die.

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